IMF warns of high corporate leverage in India

The International Monetary Fund (IMF) has said India may need to raise interest rates further to tame inflation, a suggestion the new government may not like given the pressing need to revive growth.

NEW DELHI: The International Monetary Fund (IMF) has said India may need to raise interest rates further to tame inflation, a suggestion the new government may not like given the pressing need to revive growth. The Washington-based multilateral lender has also warned of macro-economic risk because of some highly-leveraged corporates.

The BJP, which is widely expected to head the next government, has laid much emphasis on economic revival in its poll promises and would need softer interest rates to kickstart investments, seen as a key reason for the slowdown. "In India, further increases in the policy rate will likely be needed to put inflation firmly on a downward path," IMF said in its outlook for the Asia-Pacific region, flagging high food inflation as a "significant economic and social issue".

India's most widely-watched gauge of prices, the Wholesale Price Index (WPI)-based inflation, rose to a threemonth high of 5.7per cent in March from 4.68 per cent in the month before. The consumer price index was up 8.31per cent in March from 8.03per cent in February. "Inflation will remain an important challenge even though it is expected to moderate (reaching 8.5per cent year over year by end-2014 and 7.5per cent by end-2015)," it said.

The Reserve Bank had left interest rates unchanged in its April 1 monetary policy review. The next review is on June 3. IMF admits higher rates will weigh on growth, which is forecast at 4.4per cent in the just-concluded fiscal. India's own estimates show growth at 4.9per cent, second consecutive year of sub-5per cent growth.

IMF expects India's growth to recover to 5.4per cent in 2014-15. The multilateral lender has said higher interest rates will also help if India faces external pressures. "In both countries (India and Indonesia) if balance of payments pressures re-intensify, a policy tightening would help reduce vulnerabilities and contain the inflationary impact of any exchange rate depreciation," IMF said. The repo rate, RBI's key policy rate, is 8per cent. Among other things, IMF has said India needs regulatory reforms and higher infrastructure investment, but added that the policy actions taken to manage external vulnerabilities have started to bear fruit.

However, IMF has concern about corporate leverage and macro-economic risk it poses. "The distribution of leverage does matter and Asia clearly has "pockets" of highly leveraged firms— including in China, Japan, India and Korea—that may pose a risk to macroeconomic stability," it said in the report. As global liquidity dries, the higher cost of funds will put further strain on stretched companies, IMF warned